Filing
Characteristics and Examination Resultsfor Small Business Corporate Returns

Issued
on June 11, 2010

Highlights

Highlights of Report
Number:2010-30-067 to the Internal
Revenue Service Commissioner forthe Small
Business/Self-Employed Division.

IMPACT ON TAXPAYERS

The Internal Revenue Service (IRS)
examines income tax returns to determine whether corporations and other
taxpayers have voluntarily complied with tax laws and reported the proper
amount of tax.Despite continuing
efforts to improve its examination process, Small Business/Self-Employed
Division examiners closed almost one out of every three (32 percent)
corporate return examinations in Fiscal Year 2009 without recommending any
adjustments.Examinations that result in
no change to the tax reported can result in an inefficient use of limited
examination resources and place an unnecessary burden on compliant taxpayers.

WHY TIGTA DID THE AUDIT

The
overall objectives of this review were to analyze IRS data for Fiscal Years
2005 through 2009 and to identify trends in the filings and audits of
conventional small business corporate returns.This audit was part of TIGTA’s Fiscal Year 2010 Annual Audit Plan to
highlight the important role a National Research Program study could have in
understanding what the filings and auditsof corporate returns mean for tax compliance.If approved and implemented, the National
Research Program study would evaluate the extent to which corporations and
their shareholders comply with the tax laws.

WHAT
TIGTA FOUND

Between
January 2005 and December 2009, the number of corporate returns processed
annually by the IRS fell seven percent, from almost 2.2 million to approximately
two million.Despite the decrease in the
number of filings, the amount of income taxes reported by corporate returns is
significant.In Processing
Year 2009, IRS records show that approximately $11 billion in corporate
income taxes was reported from about 542,000 corporate returns.

One factor
that may be contributing to the modest decline in corporate return filings is
the popularity of organizing a business as a partnership or S corporation,
which allows the partners and shareholders of these entities to avoid double
taxation on business profits.According
to the IRS, the number of partnership and S corporation filings is expected to
increase by 49 percent and 39 percent, respectively, between 2006 and
2014.

IRS officials
told TIGTA that the IRS is not permitted to set a target for the examination
no-change rate.However, in 2003, the IRS
reported to Congress that a high no-change rate means a significant amount of
resources are being devoted to unproductive examinations, and compliant
corporations are being unnecessarily burdened by examinations.

The results of the National Research Program study are
expected to improve the IRS examination process by helping ensure the taxes on
hundreds of billions of dollars of income earned by United States corporations are
reported and paid properly.The
statistical validity and comprehensiveness of the study is designed to provide
the IRS with updated compliance data needed for deciding which corporate
returns should be examined and how best to focus examination resources on the
most significant areas of noncompliance.

WHAT TIGTA RECOMMENDED

Although TIGTA
did not make any recommendations in this report, IRS officials were provided an
opportunity to review the draft report.IRS management did not provide any comments on the draft report.